Banking Law Prof Blog

Goldman and Gadhafi: Strange Bedfellows

According to a Wall Street Journal article by Margaret Coker and Liz Rappaport:

"In early 2008, Libya's sovereign-wealth fund controlled by Col. Moammar Gadhafi gave $1.3 billion to Goldman Sachs Group to sink into a currency bet and other complicated trades. The investments lost 98% of their value, internal Goldman documents show.

What happened next may be one of the most peculiar footnotes to the global financial crisis. In an effort to make up for the losses, Goldman offered Libya the chance to become one of its biggest shareholders, according to documents and people familiar with the matter."

Link to article "Libya's Goldman Dalliance Ends in Losses, Acrimony":  http://online.wsj.com/article/SB10001424052702304066504576347190532098376.html

(ag) May 31, in Economy, Global Markets

Stop Arguing for a Free Market Economy If You Don't Really Mean It

Yes, the U.S. exhibits many characteristics of a market economy -- and reaps many of the benefits.  However, has anyone else noticed that the same people and organizations that argue most vociferously and back up their cries for a "free market economy" with the most lobbying dollars are the first to go for a government handout when it benefits them?

Case in point: "Wall Street is increasingly believing that QE3 is coming."  This according to CNBC Trader Talk with Bob Pisani. 

This is the same Wall Street that led us into the Great Recession because of "easy money."  These same great minds -- never having been made accountable for the last bubble and bust -- are apparently suggesting that the Federal Reserve once again pump extra liquidity into the economy.

Really???

LInk:  http://www.cnbc.com/id/43180180

(ag) May 31, 2010, in Economy

Reckless Endangerment - "Must Read"

 
Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon by Gretchen Morgenson and Joshua Rosner.

Link to New York Times Book Review:  http://www.nytimes.com/2011/05/29/books/review/book-review-reckless-endangerment-by-gretchen-morgenson-and-joshua-rosner.html?src=me&ref=books

(ag) May 28, 2011, in Economy

Wrongful Foreclosure on 178 Military Service Members

The Justice Department announced settlements by two mortgage servicing companies — a subsidiary of Bank of America formerly known as Countrywide Home Loans Servicing, and Saxon Mortgage Services, a subsidiary of Morgan Stanley - accused of knowingly and repeatedly violating the Servicemembers Civil Relief Act.  This federal law provides financial and legal protections to military personnel. These mortgage servicing companies failed to obtaint court orders before foreclosing on active-duty service members. 

Morgan Stanley and Bank of America set aside at least $22 million to settle federal complaints that they wrongfully foreclosed on homes owned by at least 178 military service members.

Link to article "Mortgage Companies Settle Suits on Military Foreclosures" by Diana B. Henriques

(ag) May 28, 2011, in Consumer Protection

Congratulations to Bloomberg's Rebecca Christie

Rebecca Christie is now reporting for Bloomberg from Brussels!

Black Swans and Black Elephants in Plain Sight

As we consider the International Monetary Fund's governance and policies, here's an interesting article on central bank independence which critiques several studies published by Augustin Carstens, head of Mexico's Central Bank and now the main candidate of emerging market countries for Managing Director of the Fund.

SSRN link to article, "Black Swans and Black Elephants in Plain Sight: An Empirical Review of Central Bank Independence" by Timothy A. Canova, Betty Hutton Williams Professor of International Economic Law, Chapman University School of Law:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1783691

FYI:  According to Vinay Gupta, "'Black Elephant" is a combination of two common phrases.
The “elephant sitting in the room” is the thing which everybody knows is important but nobody will talk about. It is a taboo.
The “black swan” is an extreme or unlikely event which shreds prior risk management strategies.
A “black elephant” – the phrase came out of an Institute for Collapsonomics meeting with @dougald, @freecloud, @hexayurt, @LloydDavis & @MikeBennet – is an event which is extremely likely and widely predicted by experts, but people attempt to pass it off as a black swan when it finally happens. Usually the experts who had predicted the event – from the economic crisis to pandemic flu – go from being marginalized to being lionized when the problem finally rears its head."
-- Vinay Gupta:  http://vinay.howtolivewiki.com/blog/flu/on-black-elephants-1450 

(ag) May 27, 2011, in Economy, Global Markets

Insider Trading, Expert Consultants, and a Corrupt Business Model

The U.S. Attorney's office in Manhattan is investigating insider trading by public-company employees who freelance as consultants.  Federal prosecutors are now looking at top executives of Primary Global Research LLC, a California "expert-network firm."

Unni Narayanan, CEO of Primary Global, and Phani Kumar Saripella, COO, both of whom are former Intel employees, are currently under scrutiny.

To date, insider trading charges have been filed against three Primary Global Research employees, five consultants and four hedge-fund employees connected to the firm. Six of the 12 have pleaded guilty.

Expert-network firms such as Primary Global Research charge a fee for linking investors with industry experts.  Investors in expert-network firms are seeking an information advantage through access to experts. Although expert-network firms say they prohibit disclosure of nonpublic information between consultants in their networks and clients, federal prosecutors suspect that confidential information is being exchanged.

In today's Wall Street Journal, Manhattan U.S. Attorney Preet Bharara is quoted as saying:  "Given the scope of the allegations to date, we are not talking simply about the occasional corrupt individual.  We are talking about something verging on a corrupt business model."

Link to article "Feds' Focus Turns to Firm's Executives" by Michael Rothfeld:  http://online.wsj.com/article/SB10001424052702304520804576347782925144772.html

(ag) May 27, 2011, in Securities Law

Recommended for Corporate Governance Classes

 
Check out MARTHA STEWART'S LEGAL TROUBLES, Joan MacLeod Heminway (editor).

(ag) May 26, 2011, in Corporate Governance, Securities Law

Taking a Jaundiced View of Goldman Sachs

Bloomberg's Jonathan Weil highlights a lengthy list of issues concerning the Goldman Sachs audit committee, including:

• James Shiro, Chairman of the Audit Committee, which is charged with overseeing Goldman's outside auditor PricewaterhouseCooper LLP.  He was PwC’s chief executive officer during the time an SEC investigation found more than 8,000 violations of auditor-independence rules.
• Rajat Gupta, former Goldman audit committee member, now accused of leaking confidential information from Goldman’s board meetings to Raj Rajaratnam, the former Galleon Group hedge-fund manager convicted this month on insider-trading charges.
• James Johnson, former CEO of Fannie Mae.  Congressional investigation found accounting violations occurred during his tenure at Fannie Mae.
• John Bryan, Goldman's lead director formerly served on General Motors' board of directors and on its audit committee.  During his tenure on the GM audit committee, the SEC accused GM of misstating financial results.
• Stephen Friedman, former chairman of Goldman's audit committee bought Goldman shares while serving as chairman of the Federal Reserve Bank of New York, one of Goldman’s regulators -- not illegal, but very bad judgment.

It's hard to argue with Jonathan Weil's conclusion:  "A housecleaning is overdue."

Link to article:  http://www.bloomberg.com/news/2011-05-25/goldman-sachs-needs-a-new-audit-committee.html

(ag) May 26, 2011, in Securities Law

Martha Stewart - Back on the Board

Martha Stewart will be back on the Board of Directors of Martha Stewart Living Omnimedia in the third quarter of 2011.  Shares of the company gained 32% after the announcement.  

She has overcome the securities scandal resulting in her 5 month incarceration, but CNN Money suggests that Martha may want to consider taking her company private -- following the model set by Hugh Hefner and Playboy.

Link to article "Martha Stewart Is Back!" by Aaron Smith: http://money.cnn.com/2011/05/25/news/martha_stewart/index.htm?iid=HP_River

Link to article "What Martha Stewart Should Learn from Hugh Hefner" by Lauren Silva Laughlin:   http://finance.fortune.cnn.com/2011/01/12/what-martha-stewart-should-learn-from-hugh-hefner/?iid=EL

Link to attribution for Martha Stewart photo:  http://en.wikipedia.org/wiki/File:Martha_Stewart_2011_Shankbone.JPG

(ag) May 25, 2011, in Securities Law

European Community & Basel III - Need More Flexibility?

The United Kingdom, Bulgaria, Lithuania, Spain, Sweden, Estonia, Slovakia have submitted a letter to Michel Barnier, the EU Commissioner for Internal Market and Services, arguing for more flexibility in implementing Basel III capital standards.  These countries don't want a regulation, which would be the most binding form of EU legislation and allow little flexibility to accommodate the domestic economic and financial conditions of individual EU countries.

Link to Financial Times article "EU States Urge Flexibility in Basel Rules" by Nikki Tait:  http://www.ft.com/cms/s/0/5705e008-8666-11e0-9d5c-00144feabdc0.html#axzz1NQGXRosI

(ag) May 25, 2011, in Basel III Capital Requirements, Economy, Global Markets

Headline Inflation and Core Inflation - What Do They Measure?

 
James Bullard, President and CEO of the Federal Reserve Bank of St. Louis, spoke today on “Commodity Prices, Inflation Targeting, and U.S. Monetary Policy.”

Core inflation measures inflation in the economy but omits consideration of inflation in food and energy prices.  Headline inflation is a comprehensive measure of inflation in the economy.  

Bullard made the point that ignoring energy prices in measures of inflation is likely to understate the true inflation rate. He said that the Federal Open Market Committee (FOMC) “should de-emphasize core inflation in order to reconnect with households and businesses that experience important price changes every day.”  

LInk: http://www.stlouisfed.org/newsroom/displayNews.cfm?article=1027

(ag) May 24, 2011, in Economy 

Ad Hominem Attacks and Just Plain Rudeness

Civility and rational argument are moving toward obsolescence in the U.S. Congress.  Once again today, personal attacks distracted focus from substantive issues.  Elizabeth Warren has been a lightning rod for personal vilification since she began to speak publicly about the need for consumer protection from financial overreaching and fraud.  Both Professor Warren and the Consumer Financial Protection Bureau threaten financial institution profits from practices like predatory lending that contributed substantially to the financial crisis.  The response is not to correct abusive practices but to take cheap shots at the messenger.  

At a hearing before the House Oversight Committee's Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs, Chairman Patrick McHenry (R-NC) accused Elizabeth Warren of lying.  Professor Warren previously testified that she provided advice advice to Treasury and Justice Department officials relating to fraud investigations of mortgage-servicing companies and subsequent settlement discussions -- but McHenry said she did not clearly say that the Iowa attorney general was among the advisees, although such advice was entirely appropriate.  

McHenry also blasted Warren over their disagreement about the amount of time for which the hearing and Warren's testimony had been scheduled.  She said one hour.  He said there was no agreement about how long she would have to testify and wait while the Committee recessed for a floor vote.  He then resorted to name-calling to support his point of view, accusing her of a "blatant sense of entitlement."

Mainstream America wants to know when Congress will focus on solving the problems that caused the financial crisis.  None of McHenry's vitriol today related to any meaningful, constructive assessment of issues in our financial institutions.  

LInk to article "Decorum Breaks Down at House Hearing" by Edward Wyatt:  http://www.nytimes.com/2011/05/25/business/25consume.html?_r=1&ref=business

(ag) May 24, 2011, in Consumer Protection, Financial Regulatory Reform

 

B of A Settlement of Overdraft Fee Case: $410 Million

A U.S. District Court judge has given preliminary approval for Bank of America to settle its part of litigation alleging excessive overdraft charges affecting 1 million customers.  The lawsuit is In re: Checking Account Overdraft Litigation, U.S. District Court, Southern District of Florida, No. 09-md-02036.  A hearing for final approval of the $410 Million settlement is scheduled for November.

JP Morgan, Citigroup, and Wells Fargo are also defendants in this class action litigation.

Link to article "BofA $410 Million Overdraft Settlement Wins Court OK" by Jonathan Stempel:  http://www.typepad.com/site/blogs/6a00d8341bfae553ef00d8341bfe1653ef/post/compose

(ag) May 23. 2011, in Overdraft Fees

OCC's Viewpoint on Too Many Regulations

Acting Comptroller John Walsh addressed the Housing Policy Council of the Financial Services Roundtable on May 19, 2011.  Much of his speech focused on too many new regulations too fast -- quite ironic given the financial crisis we apparently so quickly forget.

Link: http://www.occ.gov/news-issuances/speeches/2011/pub-speech-2011-60.pdf

(ag) May 23, 2011, in Financial Regulatory Reform 

More Hedge Fund Investigations

SAC Capital is the subject of an investigation headed by Senator Chuck Grassley (R-IA).  He has requested information from the Financial Industry Regulatory Authority (FINRA), which regulates brokerage funds.

Link to article:  http://www.huffingtonpost.com/2011/05/22/sac-capital-trading-charles-grassley_n_865209.html

Link to general information about FINRA:  http://www.finra.org/AboutFINRA/

(ag) May 22, 2011, in Securities Law

The Martin Act: What Is It and How Can It Be Used to Hold Wall Street Accountable?

New York's Martin Act has been called "one of the most powerful prosecutorial tools in the country." This state law has been used by New York Attorneys General Spitzer, Cuomo, and now Schneiderman to go after fraudulent banking, securities, and hedge-fund activities.  For a succinct explanation, see "Cuomo to E&Y:  Let Me Introduce You to My Good Friend, Martin" by Ashby Jones: 

" . . .the Martin Act allows New York’s top law enforcer to go after wrongdoing connected to the sale or purchase of securities. Nothing too noteworthy there.
But what is noteworthy is the power the act confers upon its user. It enables him to subpoena any document from anyone doing business in New York and, if he so desires, keep an investigation entirely secret. People subpoenaed in Martin Act cases aren’t afforded a right to counsel or the right against self-incrimination. “Combined, the act’s powers exceed those given any regulator in any other state,” wrote Nicholas Thompson in this 2004 Legal Affairs article.
And we haven’t even gotten to the kicker. Courts in civil Martin Act cases have held that “fraud” under the Martin Act “includes all deceitful practices contrary to the plain rules of common honesty and all acts tending to deceive or mislead the public, whether or not the product of scienter or intent to defraud.”
In other words, in order to prove a Martin Act violation, the attorney general is not required to prove that the defendant intended to defraud anyone, only that a defrauding act was committed.
Much has been written about the law in recent years, a phenomenon partly attributable to its strange history. The law dates to 1921, but wasn’t widely used until the middle of 2001, when, prompted by a new staffer named Eric Dinallo, who was defeated in this year’s AG primary, told then-AG Eliot Spitzer about the law."

Link: http://blogs.wsj.com/law/2010/12/21/cuomo-to-ey-let-me-introduce-you-to-my-good-friend-martin/

Most recently, New York Attorney General Eric Schneiderman is using the Martin Act as the basis for his investigation of mortgage bond fraud.  He is conducting "discussions" with executives of Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Morgan Stanley and UBS AG.

Link to Wall Street Journal Article "U.S. Steps Up Loan Scrutiny" by Nick Timiraos, Ruth Simon, & Jean Eaglesham:  http://online.wsj.com/article/SB10001424052748704083904576335582428039612.html?mod=googlenews_wsj

(ag) May 21, 2011, in Securities Law  

The U.S. Stock Market Today: "It's All about the Euro"

Reuters attributes today's stock market declines to problems with the Euro and the result of a strengthening dollar for multinational companies:

"Euro -- it's all about the euro. Keep in mind, your other problem out there is that as the dollar strengthens, your multinational dollar-sensitive, large cyclical companies go down also," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
"So it's not just the commodity stocks. It's those capital goods stocks that are (also) dollar sensitive."

Exorbitant cotten prices are also having notable impact on certain stocks.

Link to article:  "Wall Street Cuts Losses as Oil Rebounds, Retailers Drag" by Chuck Mikolajczak

(ag) May 20, 2011, in Global Markets

CSBS Elects New Officers

The Conference of State Bank Supervisors CSBS) announces its 2011-2012 Executive Committee:

• Chairman: Louisiana Commissioner of Financial Institutions John P. Ducrest 
• Chairman-Elect: California Commissioner of Financial Institutions William S. (Bill) Haraf 
• Vice Chairman: Tennessee Commissioner of Financial Institutions Greg Gonzales 
• Secretary: Arkansas State Bank Commissioner Candace Franks
• Treasurer: Kentucky Commissioner of Financial Institutions Charles A. Vice 
• Immediate Past Chairman: North Carolina Commissioner of Banks Joseph A. Smith, Jr.

(ag) May 20, 2011, in Banking

FinCEN Releases Two Money Laundering Reports

The Financial Crimes Enforcement Network (FinCEN), the agency charged with anti-money laundering responsibilities, has released two reports compiled from information gathered from suspicious activity reports (SARs) filed in 2010.  The reports are available on the FinCEN website. 

• SAR Activity Review - By the Numbers:   http://www.fincen.gov/news_room/rp/sar_by_number.html
• SAR Activity Review: Trends, Tips & Issues:   http://www.fincen.gov/news_room/rp/sar_tti.html

Link to reports:  

(ag) May 19, 2011, in BSA/AML